US energy vulnerability in the 1990s: A reassessment

This report focuses on the oil supply system because it is most vulnerable to supply disruptions with major consequences for national security. Oil has been described as the world's most important primary commodity, supplying about 40% of US total energy consumption, and an even larger share for our Allies (e.g., Japan, 56%; OECD, 42%). Oil is one of the most flexible and portable sources of energy; oil markets are global, interconnected, and integrated to a much greater extent than those of other fuels. Oil supply disruptions have occurred fairly frequently over the last 25 years and can have major economic impacts depending on the supply/demand balance, level of excess capacity, sharpness of the price response, the duration of the disruption, and the policy/political response of major oil consuming nations. Our economic vulnerability to oil supply interruptions is caused primarily by the great difficulty that the economy has in adjusting to large, unexpected increases in the price of oil. Sudden interruptions in oil supply can cause these price spikes because oil demand is very inelastic in the ''short run'' - large price increases are necessary to overcome small shortages. The economic losses come principally from macroeconomic adjustment problems (e.g., increased inflation,more » higher unemployment) as well as higher oil import bills. Low oil prices increases our dependence on low cost oil producers, principally the Persian Gulf countries. The increased share of world oil production from the Persian Gulf directly affects the level of damages that could potentially occur from a major interruption of supply from this volatile and unstable region. We also found that release of strategic reserves can substantially mitigate economic losses as government oil stockpiles can serve as temporary spare capacity during a supply disruption.« less